Excluding the ‘Breach Date Rule’ in Damages for Breach of Contract

It
is well-known that a claimant who establishes that the defendant is in breach
of contract is entitled to recover, as damages, any loss that was caused and which
the defendant knew or ought to have known was likely to be caused by breach. As
Professor Burrows explains in Remedies
for Tort and Breach of Contract, the two limbs of the remoteness test in section
73 of the Indian Contract Act,
1872 (Hadley v Baxendale(1854) 23 LJ Ex 179) collapse into this single
formulation, since the defendant ought to know that a type of loss which “naturally
arises in the usual course of things” is likely to occur. One important
question that the Indian courts have not explicitly considered is this: on whatdate is the claimant’s loss assessed for the purposes of section 73? This
question is of considerable importance in principle and practice. Consider the
facts of the Golden Victory,
where the owner of a vessel claimed damages for the repudiation, in December
2001, of a charterparty by the charterers, some four years before the
charterparty was to expire. The CPA provided that the charterers could cancel
the charterparty (without any liability) should war break out between certain
countries, including the UK, USA and Iraq. In March 2003, the Gulf War broke
out and it was common ground that the charterers, if the CPA had been alive on
that date, could have cancelled the charterparty. The question was whether the
owners were entitled to damages (the difference between the market hire and the
charter-hire) for the entire four year period, or only for the period between
the repudiation (December 2001) and the outbreak of the Gulf War, when the
charterers could have cancelled in any event. The owners argued that the subsequent
outbreak of the war was irrelevant because loss must be assessed on the date of
breach. By a majority, the House of Lords held that the owner could not recover
damages for loss caused after March 2003 because that would leave the owner better off than if the contract had not
been terminated. This was because the underlying principle of Hadley v Baxendale (and section 73) is
that the claimant must be restored to the position in which he would have been
had the contract been performed (Robinson
v Harman (1848) 154 ER 363).

In the Golden
Victory, the House of Lords accepted that loss ordinarily falls to be
assessed “as of” the date of breach, but said that a court may exceptionally
deviate from this if the interests of justice and/or the proper assessment of
damages demand it. It is immediately obvious that this formulation of the
exception is not satisfactory, for it offers little guidance as to the basis on
which the exception must be made. In any case, the Golden Victory illustrates the importance of the ‘breach-date’
rule, as it is widely known.

In a recent decision at first instance, Novasen v
Alimenta, Popplewell J. has considered two interesting points in
relation to the Golden Victory: (a) whether it applies the same way to
one-off contracts as it does to long-term contracts; and (b) how parties might exclude the operation of the Golden Victory and insist on assessment of
loss as of the date of breach. Novasen agreed to sell about 2000 metric tons of
Senegal crude groundnut oil to be delivered in Genoa by 10 January 2008 (later extended
to 2 April 2008). Clause 22 of the contract, a Prohibition Clause, provided
that if Senegal (or any other relevant Government) imposed a ban or embargo on
the export of such products, the time for performance was to be extended by 30
days, and the contract would terminate at the end of that period if the ban was
still in force. On 2 April 2008, there was such a ban in Senegal. Novasen
communicated this to Alimenta but also purported to repudiate the contract on
that date, which was accepted by Alimenta. The contract therefore came to an
end, and Alimenta brought a claim for damages for wrongful repudiation. Novasen’s
case was that, applying the Golden
Victory, Alimenta had suffered no loss because, if the contract had not
been terminated and therefore extended by 30 days, it would have come to an end
in May 2008 because the ban imposed by the Senegal government was still in
force.

Popplewell J. rejected that argument. He left open the
question whether the Golden Victory
can at all apply to a one-off sale, such as this contract. In principle, there
seems to be no reason it should not (except perhaps the ‘certainty’ that a buyer
has that he can recover a loss caused by entering the market and buying a
substitute) but it was unnecessary for Popplewell J. to decide it because leading
counsel for Alimenta did not press it. Alimenta’s case was, instead, that Clause
25 of the contract excluded the Golden
Victory. Although of no wider significance to the law (except for one
observation noted below), this raised an interesting issue of construction. As
Popplewell J. explains, Clause 25 consisted of three components:

Clause 25

(1)In
default of fulfilment of this contract by either party, the other party at his
discretion shall, after giving notice, have the right either to cancel the
contract or the right to sell or purchase, as the case may be, against the
defaulter who shall on demand make good the loss, if any, on such sale or
purchase.

(2)If
the party liable to pay shall be dissatisfied with the price of such sale or
purchase, or if neither of the above rights is exercised, the damages, if any, shall, failing amicable settlement, be
determined by arbitration.

(3)The
damages awarded against the defaulter shall be limited to the difference between the contract price and the
actual or estimated market price on
the day of default. Damages to be computed on the mean contract
quantity. If the arbitrators consider the circumstances of the default justify
it they may, at their absolute discretion, award damages on a different
quantity and/or award additional damages.

Alimenta’s case was that the Golden Victory did not apply because clause 25(3) expressly provided
that damages shall be the difference between the market price and the contract
price “on the day of default”. At
first sight, this appears to be a strong argument, since it is, of course, open
to parties to so agree. But Popplewell J. held that clause (3) did not confer aright to claim damages: it limited the right conferred by clause (2),
which allowed the parties to claim “damages,
if any”. The words “damages, if any” were a reference to the common law
measure of damages, including the Golden
Victory. Clause (3) limited this
right: as Popplewell J. put it, “[i]t
confers no right to recover “damages, if any” if no damage has been suffered”.

The important point of principle in the case is the
relationship between the default rules of common law and contractually agreed
remedies for breach. The usual context in which this arises is where parties
attempt to limit a remedy that is
otherwise available: by a variety of techniques, such as incorporation, the
courts require clear words to give effect to an exclusion. This case was the
converse: had the parties created a remedy that the common law does not
otherwise provide (i.e., the ability to recover losses that had not, according
to common law remoteness rules, been incurred?) Popplewell J. held that the
same rule of construction applies—that is, clear words are required before the
court is persuaded that the parties intended that one of them may recover
damages although no loss has been sustained.

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